Wealthy clients likely to move money faster than ever
The private banking arms of investment banks could suffer an exodus of wealthy clients as a result of the credit crisis, according to criminal lawyer Joseph Hill, who is leader of an action group lobbying for better treatment for investors with £5.8bn ($7.4bn) in a troubled enhanced money market fund sponsored by AIG.
Hill said in an email that the banks are facing a challenge after advising clients at the time they invested in the fund.
Clients, including UK television presenter Jeremy Clarkson, have said that they were under the impression that they were putting their money in a fund which would act like a deposit account, which turned out not to be the case when AIG was forced to suspend redemptions.
Hill said: "Membership of our action group has doubled overnight. I don't think investment banks realise the extent of the resentment towards them. There is a real risk they will lose their client base."
Problems erupted for the fund when AIG, a US-based insurer, ran into trouble and had to be rescued by the US government. About 50% of the fund was ploughed into investments which could not be readily liquidated, and AIG was forced to suspend redemptions.
The vast bulk of the fund's less liquid assets are secure. But it has emerged that 2% of the fund was invested in bonds with a credit rating below single A. This includes a notional £90m in securities issued by Lehman Brothers, now bankrupt. Other downgraded holdings include £45m in IKB Deutsche Industriebank; £62m in CIT Group and £13m in Washington Mutual.
AIG has made it possible for investors to switch half their cash into its standard product, which will enable them to make immediate redemptions. The other half can be switched into a recovery fund in December, but Mark Hawthorne, AIG assistant general manager, warned last week that recent trading data suggest that investors would only recover between 50% and 85% of full value.
According to an illustration provided in an AIG client letter, the market suggests that 80% of full value will be achieved, leading to the risk of disappointment if values trend down, although the 50% to 80% range is spelled out in another document.
For tax reasons, it is possible that clients will feel obliged to leave their money with AIG, rather than grabbing opportunities to remove part of it. According to AIG, 90% of instruments, if transferred to the recovery fund, will have matured safely by 2012: "This means that even if the financial markets do not improve we will not be forced to sell large quantities of assets at distressed prices."
At the current rate of progress, Hill expects to have 500 members of his action group within a fortnight. He has pointed out that 9,000 investors had put money into the fund, seen as a core strategy to enhance income at little risk, prior to recent events. "Everyone I have spoken to, over 130 investors, are thoroughly dissatisfied. I expect the proposals will be wholly unacceptable."
Banks whose clients put money into the AIG product include Barclays Wealth, UBS, Coutts, Lloyds TSB and HSBC, plus a range of independent financial advisers. In statements, the banks confirmed they are in touch with clients, and are determined to achieve the best possible result for them. There is no evidence that misselling has taken place. One independent adviser said: "I don't think anyone could ever anticipated what has taken place."
Another adviser said: "The "key features" documentation provided with the AIG product may well reinforce the position of banks. The same is true with a range of structured products which have run into difficulties. But the blow to the reputation of banking advisers is serious."
A spokeswoman “We have set out to be as transparent as we possible.”
Separately, analysts said UK-based private banks could suffer client losses from customers who are concerned about the UK government’s part nationalisation of much of the private-sector banking sector.
Edward Jewson, director of Jewson Associates, an independent investment consultant, said: “It’s too early to know whether the bailout will succeed in stabilizing the financial system. Although the larger banks are under severe pressure, smaller independent banks say business is booming, and clients may wish to defect from the banks involved with the bailout, even though some people may like the idea of being in the safe hands of the government.”
Jewson added: "On the other hand, some clients will like the idea of being in the safe hands of the government.”
The eight banks which have been linked to the bailout plan, which could include a capital injection, are Abbey National, Barclays, HBOS, HSBC Bank, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.
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